2017 (10) TMI 49 - AT - Income Tax

Appeal partly allowed, issues remanded for fresh consideration. Emphasis on transfer pricing analysis and consistency.

The appeal was partly allowed for statistical purposes, with several issues remanded for fresh consideration and others decided based on existing legal ... TPA - selection of comparable - selection criteria - Held that:- The assessee under the provision of software research and development services carries out R&D services for its AE for the development of software products to its CDS utilizing R&D technology of CDS only. CDS specifies R&D services to be performed; products to be developed or used; timeline for completion and specific result to be achieved. The entire conceptualizing of the marketing strategy for sales of its products and services, securing of orders of its products are done by CDS and not by the assessee. The assessee company is purely a ‘captive service provider’ and does not undertake any kind of marketing or development functions. Conceptualization of services and determination of exact scope of work, which is to be performed by the assessee, is responsibility of CDS. Even the quality control, testing of the products is all done by CDS. Now, if we analyze the functions of the assessee, which is purely R&D being a captive unit companies functionally dissimilar with that of assessee need to be deselected from final list of comparability. T.P. Adjustment on account of interest on outstanding receivables - Held that:- We direct the TPO to first of all examine the working capital adjustment worked out by the assessee vis-à-vis the comparables and then to see whether the assessee has factored the impact of the receivables on the working capital and thereby pricing/profitability vis-à-vis that of the comparables and see the impact of capital adjustment on outstanding receivables. Foreign exchange fluctuation cost - whether is operating or not? - Held that:- As regard the issue whether forex loss is to be regarded as operating cost or not, is no longer debatable issue as foreign exchange gain or loss relatable to an international transaction is always part and parcel of such underlined transaction. When an international transactions are entered into with the AE, one of whom is resident of other contracting state and the transactions are in foreign currency, then any gain or loss on account of forex is inherent item of cost or profit. For the purpose of determining the profit realized on the international transaction, all operating costs incurred for the purpose of providing the services to the AE have to be taken into account. Therefore, no question arises whether the foreign exchange gain or loss is non-operating in nature or not. Thus, we hold that forex loss or gain is operating costs or gain and accordingly, we allow this ground raised by the assessee. Director’s remuneration between STP unit and non-STP unit - Held that:- As admitted by both the parties that this matter had come for consideration before the Tribunal in the assessee’s own case in assessment year 2008-09 this matter has been remanded back to the file of the AO for fresh examination. Issues Involved:1. Validity of the final assessment order and upward adjustments.2. Transfer Pricing adjustments including economic analysis, comparable companies, and computational errors.3. Corporate tax issues including allocation of director's remuneration.4. Penalty and interest under sections 271(1)(c), 234B, 234C, and 234D.Detailed Analysis:1. Validity of the Final Assessment Order and Upward Adjustments:The assessee challenged the final assessment order dated 25.2.2014, asserting it was bad in law and void-ab-initio. The order increased the total income from INR 37,65,99,859 to INR 66,75,13,660 due to adjustments in transfer pricing (INR 28,92,41,993) and corporate tax matters (INR 16,71,808).2. Transfer Pricing Adjustments:Economic Analysis and Comparable Companies:The assessee contested the rejection of its economic analysis and the inclusion/exclusion of certain comparable companies by the DRP/TPO/AO. The Tribunal addressed the following key points:- Bodhtree Consulting Limited: Excluded due to functional dissimilarity and abnormal business operations.- Infosys Technologies Limited: Excluded due to its large scale of operations, significant R&D expenditure, and brand value.- Sonata Software Limited: Remanded to TPO to verify related party transactions exceeding 25%.- Gold Stone Technologies: Remanded to TPO for re-examination with available segmental information.IT Back Office Support Services:The Tribunal reviewed the inclusion of comparable companies:- Accentia Technologies Ltd.: Excluded due to insufficient segmental information and acquisition impacting trading results.- Cosmic Global Ltd.: Included based on consistency in previous and subsequent years despite outsourcing activities.- e-Clerx Services Ltd.: Excluded as it provides high-end KPO services.- Vishal Info Tech (Coral Hub Ltd.): Excluded due to its outsourcing model and significant intangibles.Inclusion of Comparables:- CG VAK Software and Exports Ltd.: Included despite low turnover, following the Delhi High Court's ruling that functional comparability is paramount.- R Systems International Limited: Included after confirming availability of financial data for the corresponding period.- Micro Land and Microgenetics Systems Ltd.: Remanded to TPO for fresh comparability analysis.Pre-Sales and Post-Sales Services:The Tribunal remanded the issue to the TPO to benchmark these services separately, aligning with the approach in subsequent years.Interest on Outstanding Receivables:The Tribunal directed the TPO to examine the working capital adjustment and its impact on receivables, following the Delhi High Court's ruling in Kusum Health Care Pvt. Ltd.Foreign Exchange Fluctuation:The Tribunal held that forex loss/gain is an operating cost, following the Delhi High Court's decision in Fiserv India (P.) Ltd.3. Corporate Tax Issues:The Tribunal remanded the issue of director's remuneration allocation between STP and non-STP units to the AO for fresh examination, following the precedent set in the assessee's case for AY 2008-09.4. Penalty and Interest:The Tribunal dismissed the ground related to the initiation of penalty proceedings under section 271(1)(c) as premature. The issue of interest under sections 234B, 234C, and 234D was deemed consequential and dismissed as infructuous.Conclusion:The appeal was partly allowed for statistical purposes, with several issues remanded for fresh consideration and others decided based on existing legal precedents. The Tribunal emphasized the need for detailed functional analysis and consistency in the application of transfer pricing principles.